Downtown condo sales up; apartment completions to set record

(Crain's) -- Sales of downtown condominiums inched higher in the fourth quarter as developers continued to cut prices to bring in buyers.

Downtown builders sold 148 condos and townhomes in the last three months of 2009, up from 56 units in the third quarter and a net loss of 253 sales in fourth-quarter 2008, when a large number of buyers canceled sales contracts, according to Appraisal Research Counselors, a Chicago-based real estate consulting firm.

But the market won't stage a meaningful comeback until the job market recovers and buyers overcome their fear of further price declines.

"They have to be convinced that the market has bottomed out and we're going to see some price appreciation," Appraisal Research Vice-President Gail Lissner said at lunch presentation Thursday.

It was an otherwise miserable year for developers, who sold just 572 units in 2009, even fewer than the 592 they sold in 2008, previously the worst year for the downtown condo market since 1997, when Appraisal Research began tracking it. The projects that did sell relied on auctions or heavy discounting to goose demand.

But the supply picture is slowly improving as construction slows and developers chip away at the pile of unsold units built during the boom of the last decade.

Developers are sitting on about 3,000 unsold condos and townhomes that have been completed or are under construction, down from about 4,000 at the end of 2008.

Oversupply is also an issue in the downtown apartment market, where developers will complete a record 2,234 units in 2010, according to Appraisal Research.

"There will be intense competition for renters," an Appraisal Research report says.

But demand for downtown apartments remains strong: Renters occupied 1,739 more units at the end of 2009 than they did a year earlier, the highest year-over-year gain Appraisal Research has ever recorded.

The problem is that demand hasn't kept up with supply, forcing landlords to lower rents. Including concessions such as free rent, rents at top-tier downtown buildings fell to $2.08 a square foot in the fourth quarter, down from $2.10 in the third quarter and $2.11 in the year-earlier period, the report says. Effective rents peaked at $2.35 in 2007.

The Class A occupancy rate, meanwhile, was 91.4% in the fourth quarter, vs. 91.9% in the third quarter and 90.6% a year earlier, according to Appraisal Research. The occupancy rate last peaked at 97.5% in 2006.

With so many units coming onto the market, Appraisal Research Vice-President Ron DeVries predicts that the occupancy rate could fall as low as 90% this year. But the construction boom ends in 2011, setting the stage for some healthy rent increases in 2012, he says.